Cody Willard: One of the ten must-own tech stocks for 2012

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You’ve undoubtedly seen one of Apple’s commercials for its voice recognition and voice response software, Siri. My favorite one is the Santa “How does the rest of my day look?” question being answered with”You have 3.7 billion appointments today” commercial running right now for Christmas.

The leading voice recognition software company in the world, Nuance NUAN, now has a forward P/E of about 16 where it was single digits just a couple months ago. It’s reportedly behind Siri according to several sellside analysts, but the company won’t confirm that. But whether or not it’s actually the technology driving Siri itself is beside the point — speech technologies are a very big part of our collective future.

I still think NUAN has a lot of upside longer-term and maybe even in the near-term if the new Apple Siri and other initiatives show traction. We’ve got some huge gains in our calls and the common we’ve owned on this one. While I’ve trimmed some of this, as it’s been up here at these new high levels, I’m planning on owning NUAN for a long time to come.

In my latest report, “10 Tech Stocks for 2012“, I highlight what I think are the ten best tech investments I can find. I’ve worked hard to find us the next Apple AAPL and the next Google GOOG, just as I found both of those long before they were the mega-cap Wall Street darlings that they are today. You can get the report for free by signing up for my Marketwatch Revolution Investing newsletter by clicking here.

Nuance is one of the stocks from the report. Here’s the analysis that we provide:

Company: 1. NUAN – Nuance Communications, Inc.

Summary

Nuance Communications offers voice and language solutions for businesses and consumers worldwide. They offer transcription solutions and dictation services that automate the input and management of information through voice recognition technologies.

Balance Sheet

Cash and Cash Equivalents: 454 M Short Term Investments: 36 M Long term Investments: –0 Total Cash: 490 M

Total Debt: 852 M Net Cash: -362 M

Outstanding Shares: 305 M Net Cash / Share: -1.2

Share Price: 19.6

Enterprise Value / Share: 20.8

Total Market Cap: 6 B

Enterprise Value: 6.3 B

2012 Sales Growth: 14.9% 2012 Earnings Estimate: 1.57

Enterprise Value Multiple: 13 Times Forward Earnings

Dividend & Yield: N/A

Last quarter Nuance Communications disappointed Wall Street and the stock got hit and it’s still below its recent highs. The buzz from the bears and the disappointed bulls was that the medical segment of the business was “decelerating.” It was, but we’re still talking about a segment that is growing double digits every quarter.

Nuance partners with virtually all the major health care industry software providers, most of which are seeing steady growth in demand. And a little-discussed aspect of Nuance’s business is licensing, in particular licensing demand for Nuance technology in the healthcare software industry. In fact, most of the competitive solutions license Nuance’s speech recognition technology, in large part because of a smart acquisition by Nuance when theybought Speech Magic from Philips.

I am always a little bit shocked when I find a profitable technology company that has net debt on the balance sheet, as Nuance does. That said, the net debt is only 5% of the market cap and just one year’s worth of cash flow from operations. I’d look for this company to grow 10%-20% or more per year for the next decade or so, at least as fast this fast-growing industry.

The fact that the stock can be bought for only 13 times forward earnings, even including for the net debt, is mostly a testament to the bodies of software companies like Nuance that Microsoft left behind over the years. The Street figures it’s just a matter of time before Nuance gets squeezed out of the industry that it helped drive for the last decade. This company’s got staying power, cutting edge technology and huge margins in a growing industry.

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About The Cody Word

Cody Willard writes the Revolution Investing investment newsletter for MarketWatch and posts the trades from his personal account at TradingWithCody.com He is the founder of WallStreetAll-Stars.com and the principal of CL Willard Capital. Cody serves as an adjunct professor at Seton Hall University and is on the University of New Mexico Alumni Board. He was an anchor on the Fox Business Network, where he was the co-host of the long-time #1-rated show on the network, Fox Business Happy Hour. Cody, a former hedge fund manager, and his stock picks and economic outlooks have been featured on NBC’s The Tonight Show with Jay Leno, ABC’s 20/20, CBS Evening News, CNBC’s SquawkBox, Jon Stewart’s The Daily Show, as well as in the Financial Times, Wall Street Journal, New York Times, and many other outlets.